BSE: Slipping Again?

August 26, 2009

The Bombay Stock Exchange’s (BSE) new management, headed by Madhu Kannan, began on a high note by strengthening its top management team. But a couple of recent decisions seem headed for controversy, especially since there is no sign of a reversal in the steady decline in trading turnover. On 19th August, Mr Kannan called an emergency meeting to consider the acquisition of Marketplace Technologies Pvt Ltd (MT) for Rs43 crore. MT, a company that offers broker back-office solutions, belongs to Ashish Chauhan who is being wooed to join the BSE as deputy CEO and has made the acquisition of MT a condition to joining. Strangely, Mr Chauhan officially denies owning MT and its website also provides no information on directors and ownership. Why is Ashish Chauhan so vital to Mr Kannan’s plan? Although he was part of the original team that set up the National Stock Exchange (NSE), he has been out of the capital market for almost a decade. Currently, Mr Chauhan is the CEO of RIL’s cricket team, Mumbai Indians.

Mr Kannan probably sees an advantage in the BSE owning a broker back-office software solution, like its two rivals. Financial Technologies, promoter of the Multi-Commodity Exchange (MCX) and MCX-SX, owns ODIN which has an 85% market share and the NSE has bought into Omnesys Technologies which owns a package called NOW. The problem is that MT has less than a dozen installations of its software and several BSE board members think that the price demanded is far too high. The decision was cleared, despite the reservations of directors such as Vivek Kulkarni, former IT secretary of Karnataka, who knows something about software valuation. If anything, BSE’s acquisition may give MT a fresh lease of life.

Ever since the BSE acquired a professional management, its CEOs have run into trouble over investments that eroded the bourse’s considerable reserves without improving its market share or turnover. Former CEO, Rajnikant Patel, resigned over a controversial decision to fork out Rs65 crore to two brokerage firms—Apollo Sindhoori and SAM Global—for market-making in the derivatives segment in the hope of whipping up trading volumes. A decision to invest Rs100 crore for a 26% stake in the National Multi-Commodity Exchange (NMCE) also turned controversial, as did the massive $60 million technology deal that was hurriedly signed by Mr Patel and the former BSE chairman, Shekhar Datta, with OMX, a Swedish Company.

Is Madhu Kannan going in the same direction? Check the similarities. BSE acquired a 15% stake in United Stock Exchange of India Ltd (USE), the fourth and newest forex derivatives bourse. Meanwhile, the BSE’s own equity and currency derivatives segments are dead. While it may be smart to lend its trading infrastructure to the USE, one cannot understand the need to invest Rs22.5 crore in the bourse. Between the acquisition of Ashish Chauhan’s company and the USE investment, the BSE’s reserves are down by another Rs65 crore. Meanwhile, equity trading turnover is down from around Rs6,000 crore a day to Rs4,000 crore in recent weeks and no new products have been launched as yet.